Basic personal auto insurance is mandated by most states and provides you with some financial protection in case of an accident. But is it enough? What are your options? Read this article to learn exactly how car insurance work and what types of coverage are available for you.
The following questions are answered in this article –
- Who is covered by my auto insurance—and under what circumstances?
- Is auto insurance coverage mandatory?
- What other types of auto insurance coverage are typical?
- What is gap insurance and do I need it?
What is auto insurance contract?
Auto insurance is a contract between you and the insurance company that protects you against financial loss in the event of any auto accident or theft. In exchange for your paying a premium, the insurance company agrees to pay your losses as outlined in your policy.
What does auto car insurance cover?
Auto insurance provides coverage for:
- Property – such as damage to or theft of your car
- Liability – your legal responsibility to others for bodily injury or property damage
- Medical – the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses
Policies are generally issued for six-month or one-year time frames and are renewable. The insurance company sends a notice when it’s time to renew the policy and pay your premium.
Who is covered by my auto insurance—and under what circumstances?
Your auto policy will cover you and other family members on your policy, whether driving your car or someone else’s car (with their permission). Your policy also provides coverage if someone who is not on your policy is driving your car with your consent.
Your personal auto policy only covers personal driving, whether you’re commuting to work, running errands or taking a trip. It will not provide coverage if you use your car for commercial purposes—for instance, if you deliver pizzas.
Personal auto insurance will also not provide coverage if you use your car to provide transportation to others through a ride-sharing service such as Uber or Lyft. Some auto insurers, however, are now offering supplemental insurance products (at additional cost) that extend coverage for vehicle owners providing ride-sharing services.
Is auto and car insurance coverage mandatory?
Auto insurance requirements vary from state to state. If you’re financing a car, your lender may also have its own requirements. Nearly every state requires car owners to carry:
Medical payments or personal injury protection (PIP), which provides reimbursement for medical expenses for injuries to you or your passengers. It will also cover lost wages and other related expenses.
Uninsured motorist coverage reimburses you when an accident is caused by a driver who does not have auto insurance—or in the case of a hit-and-run. You can also purchase under insured motorist coverage, which will cover costs when another driver lacks adequate coverage to pay the costs of a serious accident.
Even if PIP and uninsured motorist coverage are optional in your state, consider adding them to your policy for greater financial protection.
What other types of auto insurance coverage are typical?
#1. Collision auto insurance
#2. Collision auto insurance
#3. Comprehensive auto insurance
#4. Glass auto insurance
- Collision auto insurance: reimburses you for damage to your car that occurs as a result of a collision with another vehicle or other object—e.g., a tree or guardrail—when you’re at fault.
- Collision auto insurance: coverage will not reimburse you for mechanical failure or normal wear-and-tear on your car, it will cover damage from potholes or from rolling your car.
- Comprehensive auto insurance: provides coverage against theft and damage caused by an incident other than a collision, such as fire, flood, vandalism, hail, falling rocks or trees and other hazards—even getting hit by an asteroid!
- Glass auto insurance: Coverage provides coverage from windshield damage, which is common. Some auto policies include no-deductible glass coverage, which also includes side windows, rear windows and glass sunroofs. Or you can buy supplemental glass coverage.
What is gap insurance and do I need it?
Collision and comprehensive only cover the market value of your car, not what you paid for it—and new cars depreciate quickly. If your car is totaled or stolen, there may be a “gap” between what you owe on the vehicle and your insurance coverage. To cover this, you may want to look into purchasing gap insurance to pay the difference. Note that for leased vehicles, gap coverage is usually rolled into your lease payments.